MB0053-International Bussiness Mgmt

8/6/2019 MB0053-International Bussiness Mgmt

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International Business Management

MB 0053

Name: Aju K Panicker

Roll number: 530911171

Learning centre: 2542

Assignment No.: Set 1

Date of submission at learning centre: 10/ 07/2011


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Q.1 What is globalization? What are its benefits? How doesglobalization help in international business? Give some instances?

Globalization (or globalisation) describes the process by whichregional economies, societies, and cultures have become integratedthrough a global network of political ideas through communication,transportation, and trade. The term is most closely associated with theterm economic globalization: the integration of national economies intothe international economy through trade, foreign direct investment,capital flows, migration, the spread oftechnology, and military presence.[1] However, globalization is usually recognized as being driven by acombination of economic, technological, sociocultural, political, andbiological factors.[2] The term can also refer to the transnationalcirculation of ideas, languages, or popular culture through acculturation.

An aspect of the world which has gone through the process can be saidto be globalized.

Against this view, an alternative approach stresses how globalization hasactually decreased inter-cultural contacts while increasing the possibilityof international and intra-national conflict.[3]

Globalization has various aspects which affect the world in severaldifferent ways

Industrial - emergence of worldwide production markets andbroader access to a range of foreign products for consumers and

companies. Particularly movement of material and goods betweenand within national boundaries. International trade inmanufactured goods increased more than 100 times (from $95billion to $12 trillion) in the 50 years since 1955.China's trade withAfrica rose sevenfold during 2000-07 alone.

Financial - emergence of worldwide financial markets and betteraccess to external financing for borrowers. By the early part of the21st century more than $1.5 trillion in national currencies weretraded daily to support the expanded levels of trade andinvestment

Economic - realization of a global common market, based on the

freedom of exchange of goods and capital Job Market- competition in a global job market. In the past, the

economic fate of workers was tied to the fate of nationaleconomies. With the advent of the information age andimprovements in communication, this is no longer the case.Because workers compete in a global market, wages are less
http://en.wikipedia.org/wiki/Economic_globalizationhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Capital_flowhttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Militaryhttp://en.wikipedia.org/wiki/Globalization#cite_note-bhagwati-0http://en.wikipedia.org/wiki/Globalization#cite_note-1http://en.wikipedia.org/wiki/Popular_culturehttp://en.wikipedia.org/wiki/Acculturationhttp://en.wikipedia.org/wiki/Globalization#cite_note-2http://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Economic_globalizationhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Foreign_direct_investmenthttp://en.wikipedia.org/wiki/Capital_flowhttp://en.wikipedia.org/wiki/Human_migrationhttp://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Militaryhttp://en.wikipedia.org/wiki/Globalization#cite_note-bhagwati-0http://en.wikipedia.org/wiki/Globalization#cite_note-1http://en.wikipedia.org/wiki/Popular_culturehttp://en.wikipedia.org/wiki/Acculturationhttp://en.wikipedia.org/wiki/Globalization#cite_note-2http://en.wikipedia.org/wiki/International_trade


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dependent on the success or failure of individual economies. Thishas had a major effect on wages and income distribution

Political - some use "globalization" to mean the creation of a worldgovernment which regulates the relationships among governmentsand guarantees the rights arising from social and economic

globalization. Politically, the United States has enjoyed a positionof power among the world powers, in part because of its strongand wealthy economy. With the influence of globalization and withthe help of the United States own economy, the People's Republicof China has experienced some tremendous growth within the pastdecade. If China continues to grow at the rate projected by thetrends, then it is very likely that in the next twenty years, there willbe a major reallocation of power among the world leaders. Chinawill have enough wealth, industry, and technology to rival theUnited States for the position of leading world power.

Most of us assume that international and global business are thesame and that any company that deals with another country for itsbusiness is an international or global company. In fact, there is aconsiderable difference between the two terms.

International companies Companies that deal with foreigncompanies for their business are considered as international companies.They can be exporters or importers who may not have any investmentsin any other country, apart from their home country.

Global companies Companies, which invest in other countries forbusiness and also operate from other countries, are considered as globalcompanies. They have multiple manufacturing plants across the globe,catering to multiple markets.

The transformation of a company from domestic to international is byentering just one market or a few selected foreign markets as anexporter or importer. Competing on a truly global scale comes later,after the company has established operations in several countries acrosscontinents and is racing against rivals for global market leadership. Thus,there is a meaningful distinction between a company that operates in

few selected foreign countries and a company that operates and marketsits products across several countries and continents with manufacturingcapabilities in several of these countries.


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Companies can also be differentiated by the kind of competitive strategythey adopt while dealing internationally. Multinational strategy andglobal competitive strategy are the two types of competitive strategy.

Multinational strategy Companies adopt this strategy when each

countrys market needs to be treated as self contained. It can be for thefollowing reasons:

Customers from different countries have different preferences andexpectations about a product or a service.

Competition in each national market is essentially independent ofcompetition in other national markets, and the set of competitors alsodiffer from country to country.

A companys reputation, customer base, and competitive position in

one nation have little or no bearing on its ability to successfully competein another nation.

Some of the industry examples for multinational competition includebeer, life insurance, and food products.

Global competitive strategy Companies adopt this strategy whenprices and competitive conditions across the different country marketsare strongly linked together and have common synergies. In a globallycompetitive industry, a companys business gets affected by thechanging environments in different countries. The same set of

competitors may compete against each other in several countries. In aglobal scenario, a companys overall competitive advantage is gaugedby the cumulative efforts of its domestic operations and the internationaloperations worldwide.

A good example to illustrate is Sony Ericsson, which has its headquartersin Sweden, Research and Development setup in USA and India,manufacturing and assembly plants in low wage countries like China,and sales and marketing worldwide. This is made possible because of theease in transferring technology and expertise from country to country.

Industries that have a global competition are automobiles, consumerelectronics (like televisions, mobile phone), watches, and commercialaircraft and so on.

Table 1.2 portrays the differences in strategies adopted by companies ininternational and global operations.


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Table 1.2: Differences between International and GlobalStrategies

Strategy International Global

Location Selected target

countries and tradingareas

Most global businesses operate in North

America, Europe, Asia Pacific, and LatinAmerica

Business Custom strategies to fitthe circumstances ofeach host countrysituation

Same basic strategy worldwide with minorcountry customisation where necessary

Product-line Adopted to localculture and particularneeds andexpectations of local

buyers

Mostly standardised products sold worldwide,moderate customisation depending on theregulatory framework

Production Plants scattered acrossmany host countries,each producingversions suitable forthe surroundingenvironment

Plants located on the basis of maximumcompetitive advantage (in low cost countriesclose to major markets, geographicallyscattered to minimise shipping costs, or use oa few world scale plants to maximiseeconomies of scale)

Source ofsupply of rawmaterials

Suppliers in hostcountry preferred

Attractive suppliers from across the world

Marketing and

distribution

Adapted to practices

and culture of eachhost country

Much more worldwide coordination; minor

adaptation to host country situations ifrequired

Cross countryconnections

Efforts made totransfer ideas,technologies,competencies andcapabilities that worksuccessfully in onecountry to anothercountry whenever sucha transfer appearsadvantageous

Efforts made to use almost the sametechnologies, competencies, and capabilities all country markets (to promote use of amostly standard strategy), new successfulcompetitive capabilities are transferred todifferent country markets

Companyorganisation

Form subsidiarycompanies to handleoperations in each hostcountry; each

All major strategic decisions closelycoordinated at global headquarters; a globalorganisational structure is used to unify theoperations in each country


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subsidiary operatesmore or lessautonomously to fithost country conditions

Benefits of globalisation

We have moved from a world where the big eat the small to a worldwhere the fast eat the slow", as observed by Klaus Schwab of the DavosWorld Economic Forum. All economic analysts must agree that the livingstandards of people have considerably improved through the marketgrowth. With the development in technology and their introduction in theglobal markets, there is not only a steady increase in the demand forcommodities but has also led to greater utilization. Investment sector iswitnessing high infusions by more and more people connected to theworld's trade happenings with the help of computers. As per statistics,

everyday more than $1.5 trillion is now swapped in the world's currencymarkets and around one-fifth of products and services are generated peryear are bought and sold.

Buyers of products and services in all nations comprise one huge groupwho gain from world trade for reasons encompassing opportunitycharge, comparative benefit, economical to purchase than to produce,trade's guidelines, stable business and alterations in consumption andproduction. Compared to others, consumers are likely to profit less fromglobalization.

Another factor which is often considered as a positive outcome ofglobalization is the lower inflation. This is because the market rivalrystops the businesses from increasing prices unless guaranteed by steadyproductivity. Technological advancement and productivity expansion arethe other benefits of globalization because since 1970s growinginternational rivalry has triggered the industries to improviseincreasingly.Globalization can be described as a process by which the people of theworld are unified into a single society and functioning together. Thisprocess is a combination of economic, technological, sociocultural andpolitical forces. Globalization, as a term, is very often used to refer toeconomic globalization, that is integration of national economies into theinternational economy through trade, foreign direct investment, capitalflows, migration, and spread of technology. The word globalization is alsoused, in a doctrinal sense to describe the neoliberal form of economicglobalization.Globalization is also defined as internationalism, howeversuch usage is typically incorrect as "global" implies "one world" as a


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single unit, while "international" (between nations) recognizes thatdifferent peoples, cultures, languages, nations, borders, economies, andecosystems exist(http://en.wikipedia.org/).Globalization has two components: the globalization of market andglobalization of production....

Some other benefits of globalization as per statistics

Commerce as a percentage of gross world product has increased in1986 from 15% to nearly 27% in recent years.

The stock of foreign direct investment resources has increasedrapidly as a percentage of gross world product in the past twentyyears.

For the purpose of commerce and pleasure, more and more peopleare crossing national borders. Globally, on average nations in 1950witnessed just one overseas visitor for every 100 citizens. By the

mid-1980s it increased to six and ever since the number hasdoubled to 12.

Worldwide telephone traffic has tripled since 1991. The number ofmobile subscribers has elevated from almost zero to 1.8 billionindicating around 30% of the world population. Internet users willquickly touch 1 billion.

Promotes foreign trade and liberalisation of economies.

Increases the living standards of people in several developing countriesthrough capital investments in developing countries by developedcountries.

Benefits customers as companies outsource to low wage countries.Outsourcing helps the companies to be competitive by keeping the costlow, with increased productivity.

Promotes better education and jobs.

Leads to free flow of information and wide acceptance of foreignproducts, ideas, ethics, best practices, and culture.

Provides better quality of products, customer services, and

standardised delivery models across countries.

Gives better access to finance for corporate and sovereign borrowers.

Increases business travel, which in turn leads to a flourishing travel andhospitality industry across the world.


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Increases sales as the availability of cutting edge technologies andproduction techniques decrease the cost of production.

Provides several platforms for international dispute resolutions inbusiness, which facilitates international trade.

Some of the ill-effects of globalisation are as follows:

Leads to exploitation of labour in several cases.

Causes unemployment in the developed countries due to outsourcing.

Leads to the misuse of IPR, copyrights and so on due to the easyavailability of technology, digital communication, travel and so on.

Influences political decisions in foreign countries. The MNCs

increasingly use their economical powers to influence political decisions.

Causes ecological damage as the companies set up pollutingproduction plants in countries with limited or no regulations on pollution.

Harms the local businesses of a country due to dumping of cheaperforeign goods.

Leads to adverse health issues due to rapid expansion of fast foodchains and increased consumption of junk food.

Causes destruction of ethnicity and culture of several regions worldwidein favour of more accepted western culture.

In spite of its disadvantages, globalisation has improved our lives invarious fields like communication, transportation, healthcare, andeducation.

1. What is culture and in the context of international businessenvironment how does it impact international business decisions?

Answer: Culture is defined as the art and other signs or demonstrations

of human customs, civilisation, and the way of life of a specific society orgroup. Culture determines every aspect that is from birth to death andeverything in between it. It is the duty of people to respect othercultures, other than their culture. Research shows that nationalcultures generally characterise the dominant groups values and


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practices in society, and not of the marginalised groups, even though themarginalised groups represent a majority or a minority in the society.

Culture is very important to understand international business. Culture isthe part of environment, which human has created, it is the total sum of

knowledge, arts, beliefs, laws, morals, customs, and other abilities andhabits gained by people as part of society.

Culture is an important factor for practising international business.Culture affects all the business functions ranging from accounting tofinance and from production to service. This shows a close relationbetween culture and international business.

The following are the four factors that question assumptions regardingthe impact of global business in culture:

National cultures are not homogeneous and the impact of globalisationon heterogeneous cultures is not easily predicted.

Culture is not similar to cultural practice.

Globalisation does not characterise a rupture with the past but is acontinuation of prior trends.

Globalisation is only one of many processes involved in cultural change.

Cultural differences affect the success or failure of multinational firms in

many ways. The company must modify the product to meet the demandof the customers in a specific location and use different marketingstrategy to advertise their product to the customers. Adaptations mustbe made to the product where there is demand or the message must beadvertised by the company. The following are the factors which acompany must consider while dealing with international business:

The consumers across the world do not use same products. This is dueto varied preferences and tastes. Before manufacturing any product, theorganisation has to be aware of the customer choice or preferences.

The organisation must manage and motivate people with broaddifferent cultural values and attitudes. Hence the management style,practices, and systems must be modified.

The organisation must identify candidates and train them to work inother countries as the cultural and corporate environment differs. The


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training may include language training, corporate training, training themon the technology and so on, which help the candidate to work in aforeign environment.

The organisation must consider the concept of international business

and construct guidelines that help them to take business decisions, andperform activities as they are different in different nations. The followingare the two main tasks that a company must perform:

Product differentiation and marketing As there are differences inconsumer tastes and preferences across nations; product differentiationhas become business strategy all over the world. The kinds of productsand services that consumers can afford are determined by the level ofper capita income. For example, in underdeveloped countries, thedemand for luxury products is limited.

Manage employees It is said that employees in Japan were normallynot satisfied with their work as compared with employees of NorthAmerica and European countries; however the production levels stayedhigh. To motivate employees in North America, they have come up withmodels. These models show that there is a relation between jobsatisfaction and production. This study showed the fact that it is toughfor Japanese workers to change jobs. While this trend is changing, thefact that job turnover among Japanese workers is still lower than theAmerican workers is true. Also, even if a worker can go to anotherJapanese entity, they know that the management style and practices willbe quite alike to those found in their present firm. Thus, even if Japanese

workers were not satisfied with the specific aspects of their work, theyknow that the conditions may not change considerably at another place.As such, discontent might not impact their level of production.

The following are the three mega trends in world cultures:

The reverse culture influence on modern Western cultures from growingeconomies, particularly those with an ancient cultural heritage.

The trend is Asia centric and not European or American centric,because of the growing economic and political power of China, India,

South Korea, and Japan and also the ASEAN.

The increased diversity within cultures and geographies.

The following are the necessary implications in international business:


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individual rights are dominant within the society. Individuals in thesesocieties form a larger number of looser relationships. A lowindividualism ranking characterises societies of a more collective naturewith close links between individuals. These cultures support extendedfamilies and collectives where everyone takes responsibility for fellow

members of their group.

Masculinity This focuses on the extent to which the society supportsor discourages the traditional masculine work role model of maleachievement, power, and control. A country with high masculinityranking shows the country experiences high level of genderdifferentiation. In these cultures, men dominate a major part of thesociety and power structure, with women being controlled anddominated by men. A country with low masculinity ranking shows thecountry, having a low level of differentiation and discrimination betweengenders. In low masculinity cultures, women are treated equal to men in

all aspects of the society.

Uncertainty Avoidance Index (UAI) This focuses on the degree oftolerance for uncertainty and ambiguity within the society that isunstructured situations. A country with high uncertainty avoidanceranking shows that the country has low tolerance for uncertainty andambiguity. A rule-oriented society that incorporates rules, regulations,laws, and controls is created to minimise the amount of uncertainty. Acountry with low uncertainty avoidance ranking shows that the countryhas less concern about ambiguity and uncertainty and has hightolerance for a variety of opinions. A society which is less rule-oriented,

readily agrees to changes, and takes greater risks reflects a lowuncertainty avoidance ranking.

Long-Term Orientation (LTO) Describes the range at which asociety illustrates a pragmatic future oriented perspective instead of aconventional historic or short term point of view. The Asian countries arescoring high on this dimension. These countries have a long termorientation, believe in many truths, accept change easily, and have thriftfor investment. Cultures recording little on this dimension, trust inabsolute truth is conventional and traditional. They have a small termorientation and a concern for stability. Many western cultures score

considerably low on this dimension.

In India, PDI is the highest Hofstede dimension for culture with a rank of77, LTO dimension rank is 61, and masculinity dimension rank is 62.


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Every society has its own unique culture. Culture must not be imposedon individuals of different culture. For example, the Cadbury KraftAcquisition, 2009 was a landmark international deal, in which a U.S.based company Kraft acquired the British chocolate giant, Cadburywhich were in complete extremes in terms of culture. Let us discuss the

major cultural elements that are related to business.

Cultural elements that relate business

The most important cultural components of a country which relatebusiness transactions are:

Language.

Religion.

Conflicting attitudes.

Cross cultural management is defined as the development andapplication of knowledge about cultures in the practice of internationalmanagement, when people involved have diverse cultural identities.

International managers in senior positions do not have direct interactionthat is face-to-face with other culture workforce, but several home basedmanagers handle immigrant groups adjusted into a workforce that offersdomestic markets.

The factors to be considered in cross cultural management are:

Cross cultural management skills

The ability to demonstrate a series of behaviour is called skill. It isfunctionally linked to achieving a performance goal.

The most important aspect to qualify as a manager for positions ofinternational responsibility is communication skills. The managers mustadapt to other culture and have the ability to lead its members.

The managers cannot expect to force members of other culture to fit intotheir cultural customs, which is the main assumption of cross culturalskills learning. Any organisation that tries to enforce its behaviouralcustoms on unwilling workers from another culture faces conflict. Themanager has to possess the skills linked with the following:


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Providing inspiration and appraisal systems.

Establishing and applying formal structures.

Identifying the importance of informal structures.

Formulating and applying plans for modification.

Identifying and solving disagreements.

Handling cultural diversity

Cultural diversity in a work group offers opportunities and difficulties.Economy is benefited when the work groups are managed successfully.The organisations capability to draw, save, and inspire people fromdiverse cultures can give the organisation spirited advantages in

structures of cost, creativity, problem solving, and adjusting to change.

Cultural diversity offers key chances for joint work and co-operativeaction. Group work is a joint venture where, the production of two ormore individuals or groups working in cooperation is larger than thecombined production of their individual work.

Factors controlling group creativity

On complicated problem solving jobs diverse groups do better thanidentical groups. Diverse groups require time to solve issues of working

together. In diverse groups, over time, the work experience helps toovercome gender, racial, and organisational and functionaldiscriminations. But the impact cannot be evaluated and there is alwaysrisk in creating a diverse group. A successful group is profitable withrespect to quick results and the creation of concern for the future.Negative stereotypes are emphasised if it fails.

Factors related with the industry and company culture are alsoimportant. Diverse groups do well when the members:

Assist to make group decisions.

Value the exchange of different points of view.

Respect each others skills and share their own.

Value the chance for cross-cultural learning.


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Tolerate uncertainty and try to triumph over the inefficiencies thatoccur when members of diverse cultures work together.

A diverse group is known to be more creative, where the members aretolerant of differences. The top management level provides its moral and

administrative support, and gives time for the group to overcome theusual process difficulties. They also provide diversity training, and thegroup members are rewarded for their commitment.

Ignore diversity

It may be difficult to manage diversity. It is better to ignore, which is analternative. The management must:

Ignore cultural diversity within the employees.

Down-play the importance of cultural diversity.

This rejection to identify diversity happens when management:

Fails to have sufficient awareness and skills to identify diversity.

Identifies diversity but does not have the skill to manage the diversity.

Recognises the negative consequences of identifying diversity probablycause greater issues than ignoring it.

Thinks the likely benefits of identifying and managing diversity do notvalidate the expected expenses.

Identifies that the job provides no chances for drawing advantages fromdiversity.

Strategies to ignore diversity may be possible when culture groups aregiven various jobs, and sharing required resources are independent inthe workplace. Groups and group members are equally incorporated andwork together. In such cases, confusion occurs when the diverse valuesystems are not identified that are held by different staff groups.

2. Cosmos Limited wants to enter international markets. Will countryrisk analysis help Cosmos Limited to take correct decisions?Substantiate your answer


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Answer: Country risk analysis is the evaluation of possible risks and rewardsfrom business experiences in a country. It is used to survey countries where thefirm is engaged in international business, and avoids countries with excessiverisk. With globalisation, country risk analysis has become essential for theinternational creditors and investors

Overview of Country Risk Analysis

Country Risk Analysis (CRA) identifies imbalances that increase the risksin a cross-border investment. CRA represents the potentially adverseimpact of a countrys environment on the multinational corporationscash flows and is the probability of loss due to exposure to the political,economic, and social upheavals in a foreign country. All businessdealings involve risks. An increasing number of companies involving inexternal trade indicate huge business opportunities and promisingmarkets. Since the 1980s, the financial markets are being refined withthe introduction of new products.

When business transactions occur across international borders, theybring additional risks compared to those in domestic transactions. Theseadditional risks are called country risks which include risks arising fromnational differences in socio-political institutions, economic structures,policies, currencies, and geography. The CRA monitors the potential forthese risks to decrease the expected return of a cross-borderinvestment. For example, a multinational enterprise (MNE) that sets up aplant in a foreign country faces different risks compared to bank lendingto a foreign government. The MNE must consider the risks from a

broader spectrum of country characteristics. Some categories relevant toa plant investment contain a much higher degree of risk because theMNE remains exposed to risk for a longer period of time.

Analysts have categorised country risk into following groups:

Economic risk This type of risk is the important change in theeconomic structure that produces a change in the expected return of aninvestment. Risk arises from the negative changes in fundamentaleconomic policy goals (fiscal, monetary, international, or wealthdistribution or creation).

Transfer risk Transfer risk arises from a decision by a foreigngovernment to restrict capital movements. It is analysed as a function ofa countrys ability to earn foreign currency. Therefore, it implies thateffort in earning foreign currency increases the possibility of capitalcontrols.


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Exchange risk This risk occurs due to an unfavourable movement inthe exchange rate. Exchange risk can be defined as a form of risk thatarises from the change in price of one currency against another.Whenever investors or companies have assets or business operationsacross national borders, they face currency risk if their positions are not

hedged.

Location risk This type of risk is also referred to as neighborhoodrisk. It includes effects caused by problems in a region or in countrieswith similar characteristics. Location risk includes effects caused bytroubles in a region, in trading partner of a country, or in countries withsimilar perceived characteristics.

Sovereign risk This risk is based on a governments inability to meetits loan obligations. Sovereign risk is closely linked to transfer risk inwhich a government may run out of foreign exchange due to adverse

developments in its balance of payments. It also relates to political riskin which a government may decide not to honor its commitments forpolitical reasons.

Political risk This is the risk of loss that is caused due to change inthe political structure or in the politics of country where the investmentis made. For example, tax laws, expropriation of assets, tariffs, orrestriction in repatriation of profits, war, corruption and bureaucracy alsocontribute to the element of political risk.

Risk assessment requires analysis of many factors, including the

decision-making process in the government, relationships of variousgroups in a country and the history of the country. Country risk is due tounpredicted events in a foreign country affecting the value ofinternational assets, investment projects and their cash flows. Theanalysis of country risks distinguishes between the ability to pay and thewillingness to pay. It is essential to analyse the sustainable amount offunds a country can borrow. Country risk is determined by the costs andbenefits of a countrys repayment and default strategies. The ways ofevaluating country risks by different firms and financial institutions differfrom each other. The international trade growth and the financialprograms development demand periodical improvement of risk

methodology and analysis of country risks.

Purpose of Country Risk Analysis

Risk arises because of uncertainty and uncertainty occurs due to the lackof reliable information. Country risk is composed of all the uncertainty


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that defines the risk of country exposure. The assessment of country riskis used to incorporate country risk in capital budgeting and modify thediscount rate.

CRA regulates the estimated cash flows and explores the main

techniques used to measure a countrys overall riskiness. It is mainlyused by MNCs, in order to avoid countries with excessive risk. It can beused to monitor countries where the MNC is engaged in internationalbusiness. Analysing the country risk helps in evaluating the risk for aplanned project considered for a foreign country and assesses gain andloss possibility outcomes of cross-border investment or export strategy.

Country detailed risk refers to the unpredictability of returns oninternational business transactions in view of information associated witha particular country. The techniques used by the banks and otheragencies for country risk analysis can be classified as qualitative or

quantitative. Many agencies merge both qualitative and quantitativeinformation into a single rating. A survey conducted by the US EXIM bankclassified the various methods of country risk assessment used by thebanks into four types. They are:

Fully qualitative method The fully qualitative method involves adetailed analysis of a country. It includes general discussion of acountrys economic, political, and social conditions and prediction. Fullyqualitative method can be adapted to the unique strengths and problemsof the country undergoing evaluation.

Structured qualitative method The structured method uses auniform format with predetermined scope. In structured qualitativemethod, it is easier to make comparisons between countries as it followsa specific format across countries. This technique was the most popularamong the banks during the late seventies.

Checklist method The checklist method involves scoring the countrybased on specific variables that can be either quantitative, in which thescoring does not need personal judgment of the country being scored orqualitative, in which the scoring needs subjective determinations. Allitems are scaled from the lowest to the highest score. The sum of scores

is then used to determine the country risk.

Delphi technique The technique involves a set of independentopinions without group discussion. As applied to country risk analysis,the MNC can assess definite employees who have the capability toevaluate the risk characteristics of a particular country. The MNC gets


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responses from its evaluation and then may determine some opinionsabout the risk of the country.

Inspection visits Involves travelling to a country and conductingmeeting with government officials, business executives, and consumers.

These meetings clarify any vague opinions the firm has about thecountry.

Other quantitative methods The quantitative models used instatistical studies of country risk analysis can be classified asdiscriminant analysis, principal component analysis, logit analysis andclassification and regression tree method

5.4.1 Data sourcing

The basic data is important to analyse a country. The economic, financial

and currency risk components are based on the variables (quantitativeand qualitative variables). The variables must consider the particularitiesof each country and the needs of the model used. The standard variablesare used to maintain the regular analysis comparable with similar worksof other countries. Therefore, the first step is to make sure that thehistorical series of official data are reliable, consistent and comparable.The standard economic variables that are found mainly in the variedapproach adopted by financial institutions and rating agencies, areassociated with the countrys real ability to repay its commitments. Thebalance of payments (summary account of economic transactions amonga country and the others nations of the world, during a period) and its

evolution through the years means a strong source of data. Theexchange rate (currency risk) is another important variable considered,as it balances the transactions (balances the prices of goods, services,and capital) between residents and non-residents. The analysis mustconsider the historical behavior of the exchange rate and the policywhich made clear whether the country follows a rational economicsapproach or it uses the exchange rate as a tool to maintain a forcedmacroeconomic equilibrium.

Apart from the macroeconomic variables which deal with the externalsector of the economy, there are some other relevant variables such as

the interest rate, level of investments, public debt and its service,internal savings, consumption, GDP or GNP, money supply, inflation rateand so on.

The analysis must be accomplished with qualitative variables, whichconsider social aspects as population, life expectancy, rate of birthday,


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rate of unemployment, level of literacy and so on. The social-politicalaspects are necessary for all kind of analysis as they describe the wholesetting of the running economy.

5.4.2 Tools

The risk management demands a regular follow up regardinggovernmental policies, external and internal environment, outlookprovided by rating agencies, and so on. Following are the toolsrecommended:

Chain of value Includes the main countries that sustain traderelationships with the nation, broken by sectors and products.

Strength and weakness chart Focus the key aspects that warn thecountry.

Table of financial markets performance Follow up the behavior ofbonds and stocks already issued and to be issued.

Table of macroeconomic variables Provides alert signals when thebehavior of any ratio presents a relevant change.

The content of country risk analysis mainly involves country history,corporate risk, dependency level, external environment,domestic financial system, ratios for economic risk evaluationand strength and weakness chart.

Country history

The historical brief helps to identify aspects that interfere in the futurebehavior of the country, reducing the ability to payback any externalcommitment. The main historical data provides a good understanding ofthe key factors which draw the behaviour of the society, thegovernment, the private sector, the legal environment, the economical,political, and the relationships to neighbour nations and the world as awhole.

5.5.2 Corporate risk

Both country risk studies and business risk analysis enhances wealthfrom the available resources, in terms of capital, natural resources,technology and labour forces. This clarifies that those kind of analysis


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procures extensive knowledge from the business approach forcompanies, including financial theory.

5.5.3 Dependency level

The next step after the history in brief, is a clear definition about how thecountry is positioned in the world in terms of its wide relationships,economic block in which it belongs to, importance of international tradeand so on. All these aspects are significant to identify the dependencylevel of the country. The financial dependency to meet the needs of acountry is also a strong concern for the analyst. In this case, the maturityof debts (internal and external) and the available sources of financingalso help to measure the freedom grades of the country.

5.5.4 External environment

The external trade is an important factor to the development ofsocieties. Globalisation has brought international business to the centerof the discussions and the external environment has become vital for allcountries.

Thus, a complete vision on economic trends, the behavior of financialmarkets, the forecasts for conflicts among nations, the improvement ofthe economic blocks, the level of openness of the world economy,financial crisis and international liquidity is a framework over which theanalysis must start.

5.5.5 Domestic financial system

The banking sector has implemented many actions to avoid losses, afterthe international crisis. Basel Committee has defined some strongmeasures to be followed by the financial houses and Central Banks aretrying to monitor their jurisdictions. Apart from those procedures,recently Asia and Turkey crisis have shown that the inspection is notenough to keep the reliability of some domestic system. Theinternational banks had developed many tools to deal with internationalcrisis. When domestic banks do not have a consistent risk managementpolicies and adequate provisions to theirs credits, the country risk

happens to be the worst. Therefore, the analysis must consider thehealth of the domestic financial system, by evaluating informationprovided by the Central Banks and, from the principal banks of thecountry. Accessing Centrals Bank policies and supervising proceduresalso help to evaluate the health of the financial system.


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5.5.6 Ratios for economic risk evaluation

Cross-border economic risk analysis evaluates the probablemacroeconomic ratios among some variables. They can be separatedinto two groups such as domestic and external. The figures must be

presented in historic series (at least five years) to provide informationabout its progress, which can be real values, percentages, or relations.The mainly used ratios and variables in case of domestic economy arethe following:

Gross domestic product (GDP) GDP per capita GDP growthrate Unemployment rate Internal savings or GDP Investment or GDP Gross domestic fixed investment orvariation of GDP Gini Index Growth domestic fixed investmentor gross domestic savings . Budget deficit or GDP Internaldebt or GDP

The monetary policy is essential as it deals with the price stability. Aneconomy which presents less instability in its prices of goods andservices, provides huge facilities to decision makers based on theirpredictions to expected returns of investments and a firm social,economical and political environment. All these aspects request asystematic approach over price indicators such as the following:

Real interest rate Percentage increase in the money supplyThe mainly used ratios and variables in case of external economy are thefollowing:

External debt or GDP Short term debts and reserves Exchange currency rate External debt services and exports .

5.5.7 Strength and weakness chart

In order to explain the significant aspects provided by the analysis, thestrength and weakness chart can be used to merge each strength andweakness with the related scenario. is a model of relationships amongseveral variables (quantitative and qualitative) to show theirinterdependency and the complexity of analysis.

3. How can managers in international companies adjust to the ethicalfactors influencing countries? Is it possible to establish internationalethical codes? Briefly explain?


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Answer: Ethics can be defined as the evaluation of moral values,principles, and standards of human conduct and its application in dailylife to determine acceptable human behaviour.

Business ethics pertains to the application of ethics to business, and is a

matter of concern in the corporate world. Business ethics is almostsimilar to the generally accepted norms and principles. Behaviour that isconsidered unethical and immoral in society, for example dishonesty,applies to business as well.

Managers are influenced by three factors affecting ethical values. Thesefactors have unique value systems that have varying degrees of controlover managers.

Religion Religion is one of the oldest factors affecting ethics. Despitethe differences in religious teachings, religions agree on the fundamental

principles and ethics. All major religions preach the need for high ethicalstandards, an orderly social system, and stress on social responsibility ascontributing factors to general well-being.

Culture Culture refers to a set of values and standards that definesacceptable behaviour passed on to generations. These values andstandards are important because the code of conduct of people reflectson the culture they belong to. Civilisation is the collective experiencethat people have passed on through three distinct phases: the huntingand gathering phase, agriculture phase, and the industrial phase. Thesephases reflect the changing economic and social arrangements in human

history.

Law Law refers to the rules of conduct, approved by the legal systemof a country or state that guides human behaviour. Laws change andevolve with emerging and changing issues. Every organisation isexpected to abide the law, but in the pursuit of profit, laws are frequentlyviolated. The most common breach of law in business is tax evasion,producing inferior quality goods, and disregard for environmentalprotection laws.

Ethics is significant in all areas of business and plays an important role in

ensuring a successful business. The role of business ethics is evidentfrom the conception of an idea to the sale of a product. In anorganisation, every division such as sales and marketing, customerservice, finance, and accounting and taxation has to follow certainethics.


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Public image In order to gain public confidence and respect,organisations must ascertain that they are honest in their transactions.The services or products of a business affect the lives of thousands ofpeople. It is important for the top management to impart high ethicalstandards to their employees, who develop these services or products.

A company that is ethically and socially responsible has a better publicimage. People tend to favour the products and services of suchorganisations. Investors trust is just as important as public image forany business. A company that practices good ethical creates a positiveimpression among its stakeholders.

Managements credibility with employees Common goals andvalues are developed when employees feel that the management isethical and genuine. Managements credibility with employees and thepublic are intertwined. Employees feel proud to be a part of an

organisation that is respected by the public. Generous compensationsand effective business strategies do not always guarantee employeeloyalty; organisation ethics is equally significant. Thus, companiesbenefit from being ethical because they attract and retain good and loyalemployees.

Better decision-making Decisions made by an ethical managementare in the best interests of the organisation, its employees, and thepublic. Ethical decisions take into account various social, economic andethical factors.

Profit maximisation Companies that emphasise on ethical conductare successful in the long run, even though they lose money in the shortrun. Hence, a business that is inspired by ethics is a profitable business.Costs of audit and investigation are lower in an ethical company.

Protection of society In the absence of proper enforcement,organisations are responsible to practice ethics and ensure mechanismsto prevent unlawful events. Thus, by propagating ethical values, abusiness organisation can save government resources and protect thesociety from exploitation.

Most countries have similar ethical values, but are practiced differently.This section deals with the way individuals in different countriesapproach ethical issues, and their ethically acceptable behaviour. Withthe rise in global firms, issues related to ethical values and traditionsbecome more common. These ethical issues create complications toMulti-National Companies (MNCs) while dealing with other countries for


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Maintain high standards of local political involvement.

Transfer technology.

Protect the environment.

Protect the consumer.

Employ labour practices that are not exploitative.

When a manager of an international firm faces an ethical problem,certain models help in solving these ethical issues

Culture is a major factor which influences marketing decisions andpractices in a foreign country. For example, in the middle-easterncountries the prior approval of the governing authorities should be taken

if a firm plans to advertise a product related to womens apparel, asshowcasing some aspects of women clothing is considered immodestand immoral

Q.5 Discuss the international marketing strategies. How is it differentfrom domestic marketing strategies?Answer:

International marketing refers to marketing of goods and products bycompanies overseas or across national borderlines. The techniques usedwhile dealing overseas is an extension of the techniques used in the

home country by the company.

Taking into account the various conditions on which markets vary anddepend, appropriate marketing strategies should be devised andadopted. Like, some countries prevent foreign firms from entering intoits market space through protective legislation. Protectionism on thelong run results in inefficiency of local firms as it is inept towardscompetition from foreign firms and other technological advancements. Italso increases the living costs and protects inefficient domestic firms.

To counter this scenario firms must learn how to enter foreign markets

and increase their global competitiveness. Firms that plan to do businessin foreign land find the marketplace different from the domestic one.Market sizes, customer preferences, and marketing practices all vary;therefore the firms planning to venture abroad must analyse allsegments of the market in which they expect to compete.


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The decision of a firm to compete internationally is strategic; it will havean effect on the firm, including its management and operations locally.The decision of a firm to compete in foreign markets has many reasons.Some firms go abroad as the result of potential opportunities to exploitthe market and to grow globally. And for some it is a policy driven

decision to globalise and to take advantage by pressurising competitors.

But, the decision to compete abroad is always a strategic down tobusiness decision rather than simply a reaction. Strategic reasons forglobal expansion are:

Diversifying markets that provide opportunistic global marketdevelopment.

Following customers abroad (customer satisfaction).

Exploiting different economic growth rates.

Pursuing a global logic or imperative to harvest new markets andprofits.

Pursuing geographic diversification.

Globalising for defensive reasons.

Exploiting product life cycle differences (technology).

Pursuing potential abroad.

Likewise, there can be other reasons like competition at home, taxstructures, comparative advantage, economic trends, demographicconditions, and the stage in the product life cycle. In order to succeed, afirm should carefully look at their geographic expansion and globalmarketing strategy. To a certain extent, a firm makes a decision aboutits extent of globalisation by taking a stance that may span from entirelydomestic to a global reach where the company devotes its entiremarketing strategy to global competition. In the process of developingan international marketing strategy, the firm may decide to do business

in its home-country (domestic operations) only or host-country (foreigncountry) only.

Segmentation


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Firms that serve global markets can be segregated into several clustersbased on their similarities. Each such cluster is termed as a segment.Segmentation helps the firms to serve the markets in an improved way.Markets can be segmented into nine categories, but the most commonmethod of segmentation is on the basis of individual characteristics,

which include the behavioural, psychographic, and demographicsegmentations. The basis of behavioural segmentation is the generalbehavioural aspects of the customers. Demographic segmentationconsiders the factors like age, culture, income, education and gender.Psychographic segmentation takes into account: beliefs, values,attitudes, personalities, opinions, lifestyles and so on.

Market positioning

The next step in the marketing process is, the firms should position theirproduct in the global market. Product positioning is the process of

creating a favourable image of the product against the competitorsproducts. In global markets product positioning is categorised as high-tech or hightouch positioning.

One challenge that firms face is to make a trade-off between adjustingtheir products to the specific demands of a country and gainingadvantage of standardisation such as the maintenance of a consistentglobal brand image and cost savings. This is task is not easy.

International product policy

Some thinkers of the industry tend to draw a distinction betweenconventional products and services, stressing on service characteristicssuch as heterogeneity (variation in standards among providers,frequently even among different locations of the same firm),inseparability from consumption, intangibility, and perishability.Typically, products are composed of some service component like,documentation, a warranty, and distribution. These service componentsare an integral part of the product and its positioning.

Firms have a choice in marketing their products across markets. Many atimes, firms opt for a strategy which involves customisation, through

which the firm introduces a unique product in each country, believingthat tastes differ so much between countries that it is necessary tocreate a new product for each market. On the other hand,standardisation proposes the marketing of one global product, with thebelief that the same product can be sold in different countries without


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significant changes. For example, Intel microprocessors are the sameirrespective of the country in which they are sold.

Finally, in most cases firms will go for some kind of adaptation. Here,when moving a product between markets minor modifications are made

to the product. For example, in U.S. fuel is relatively cheap, thereforecars have larger engines than the cars in Asia and Europe; and thenagain, much of the design is identical or similar.

8.3.4 International pricing decisions

Pricing is the process of ascertaining the value for the product or servicethat will be offered for sale.

In international markets, making pricing decisions is entangled indifficulties as it involves trade barriers, multiple currencies, additional

cost considerations, and longer distribution channels. Before establishingthe prices, the firm must know its target market well because when thefirm is clear about the market it is serving, then it can determine theprice appropriately. The pricing policy must be consistent with the firmsoverall objectives. Some common pricing objectives are: profit, return oninvestment, survival, market share, status quo, and product quality.

The strategies for international pricing can be classified into the followingthree types:

Market penetration Market holding: Market skimming:

The factors that influence pricing decisions are inflation, devaluation andrevaluation, nature of product or industry and competitive behaviour,market demand, and transfer pricing.

The approach taken by company towards pricing when operating ininternational markets are ethnocentric, polycentric, and geocentric.

Price can be defined by the following equation:

The pricing decision enables us to change the price in many ways, someof them are:
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Sticker price changes . Change quantity Change quality Change terms

Transfer pricing

Transfer pricing is the process of setting a price that will be charged by asubsidiary (unit) of a multi-unit firm to another unit for goods andservices, which are sold between such related units.

Transfer pricing is determined in three ways: market based pricing,transfer at cost and cost-plus pricing. The Arms Length pricing rule isused to establish the price to be charged to the subsidiary.

Many managers consider transfer pricing as non-market based. Thereason for transfer pricing may be internal or external. Internal transferpricing include motivating managers and monitoring performance.

External factors include taxes, tariffs, and other charges.

Transfer Pricing Manipulation (TPM) is used to overcome these reasons.Governments usually discourage TPM since it is against transfer pricing,where transfer pricing is the act of pricing commodities or services.However, in common terminology, transfer pricing generally refers TPM.

International advertising

International advertising is usually associated with using the same brandname all over the world. However, a firm can use different brand names

for historic reasons. The acquisition of local firms by global players hasresulted in a number of local brands. A firm may find it unfavourable tochange those names as these local brands have their own distinctivemarket.

The purpose of international advertising is to reach and communicate totarget audiences in more than one country. The target audience differfrom country to country in terms of the response towards humour oremotional appeals, perception or interpretation of symbols and stimuliand level of literacy. Sometimes, globalised firms use the sameadvertising agencies and centralise the advertising decisions and

budgets. In other cases, local subsidiaries handle their budget, resultingin greater use of local advertising agencies.

International advertising can be thought of as a communication processthat transpires in multiple cultures that vary in terms of communicationstyles, values, and consumption patterns. International advertising is a


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business activity and not just a communication process. It involvesadvertisers and advertising agencies that create ads and buy media indifferent countries. This industry is growing worldwide. Internationaladvertising is also reckoned as a major force that mirrors both socialvalues, and propagates certain values worldwide.

International promotion and distribution

Distribution of goods from manufacturer to the end user is an importantaspect of business. Companies have their own ways of distribution. Somecompanies directly perform the distribution service by contacting otherswhereas a few companies take help from other companies who performthe distribution services. The distribution services include:

The purchase of goods.

The assembly of an attractive assortment of goods.

Holding stocks.

Promoting sale of goods to the customer.

The physical movement of goods.

In international marketing, companies usually take the advantage ofother countries for the distribution of their products. The selection ofdistribution channel is helpful to gain the competitive advantage. The

distribution channel is also dependent on the way to manage and controlthe channel. Selecting the distribution channel is very important foragents and distributors.

Domestic vs. International marketing

Domestic marketing refers to the practice of marketing within a firmshome country. Whereas International or foreign marketing is the practiceof marketing in a foreign country; the marketing is for the domesticoperations of the firm in that country.

Domestic marketing finds the "how" and "why" a product succeeds orfails within the firms home country and how the marketing activityaffects the outcome. Whereas, foreign marketing deals with thesequestions and tries to find answers according to the foreign marketconditions and it provides a micro view of the market at the firms level.


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In domestic marketing a firm has insight of the marketing practices,culture, customer preferences, climate and so on of its home country,while it is not totally aware of the policies and the market conditions ofthe foreign country.

The stages that have led to achieve global marketing are:

Domestic marketing Firms manufacture and sell products within thecountry. Hence, there is no international phenomenon.

Export marketing Firms start exporting products to other countries.This is a very basic stage of global marketing. Here, the products aredeveloped based on the companys domestic market although the goodsare exported to foreign countries.

International marketing Now, Firms start to sell products to various

countries and the approach is polycentric, that is, making differentproducts for different countries.

Multinational marketing In this stage, the number of countries inwhich the firm is doing business gets bigger than that in the earlierstage. And hence, the company identifies the regions to which thecompany can deliver same product instead of producing different goodsfor different countries. For example, a firm may decide to sell sameproducts in India, Sri lanka and Pakistan, assuming that the people livingin this region have similar choice and at the same time offering differentproduct for American countries. This approach is termed regiocentric

approach.

Global marketing Company operating in various countries opts for acommon single product in order to achieve cost efficiencies. This isachieved by analysing the requirements and the choice of the customersin those countries. This approach is called Geocentric approach.

The practice of marketing at the international stage does not designateany country as domestic or foreign. The firm is not considered as thecorporate citizen of the world as it has a home base.

The firm must not have a single marketing plan, because there aredifferences between the target markets (that is domestic or internationalmarkets). There should never be a rigid marketing campaign. A firm thatis successful internationally first obtains success locally.


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Few approaches that you can consider for an international marketingare:

Advertise as a foreign product By doing so, the product will beconsidered as genuine and original in some countries.

Joint partnership with a local firm finding a firm that has alreadyestablished credibility will benefit a lot. The product will be considered asa local product by following this marketing approach.

Licensing You can sell the rights of your product to a foreign firm.Here the problem is that the firm may not maintain the quality standardand therefore may hurt the image of the brand.

Culture is a major factor which influences marketing decisions andpractices in a foreign country. For example, in the middle-eastern

countries the prior approval of the governing authorities should be takenif a firm plans to advertise a product related to womens apparel, asshowcasing some aspects of women clothing is considered immodestand immoral.

Q.6 Explain briefly the international financial managementcomponents with examples and applicability

Answer: The term Financial Management refers to the propermaintenance of all the monetary transactions of the organisation. It alsomeans recording of transactions in a standard manner that will show the

financial position and performance of the organisation. The FinancialManagement can be categorised into domestic and internationalfinancial management.

The domestic financial management refers to managing financialservices within the country. International financial management refers tomanaging finance and share between the countries.

The main aim of international finance management is to maximise theorganisations value that in turn will increase the impact on the wealth ofthe stockholders. When the doors of liberalisation opened, entrepreneurscapitalised the opportunity to step their foot to conduct business indifferent parts of the world.

International trade gave way for the growth of international business. Fora corporation to be successful, it is vital to manage the finance andbusiness accounts appropriately. The rise in significance and complexityof financial administration in a global environment creates a great


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challenge for financial managers. The contributions of different financialinnovations like currency derivative, international stock listing, andmulticurrency bonds have necessitated the accurate management of theflow of international funds through the study of international financialmanagement.

The International Financial Management (IFM) came to its existencewhen the countries all over the world started opening their doors foreach other. This phenomenon is also called as liberalisation. But after theend of the Second World War, the integration in terms of foreignactivities has grown substantially. The firms of all types are now optingto operate their business and deploy their resources abroad.Furthermore, the differences between the countries have persisted thathas given rise to the prevalence of market imperfections

Components of International Financial Management

Foreign exchange market

The Foreign exchange or the forex markets facilitates the participants toobtain, trade, exchange and speculate foreign currency. The foreignexchange market consists of banks, central banks, commercialcompanies, hedge funds, investment management firms and retailforeign exchange brokers and investors. It is considered to be theleading financial market in the world. It is vital to realise that the foreignexchange is not a single exchange, but is created from a global networkof computers that connects the participants from all over the world.

The foreign exchange market is immense in size and survives to serve anumber of functions ranging from the funding of cross-borderinvestment, loans, trade in goods, trade in services and currencyspeculation. The participant in a foreign exchange market will normallyask for a price.

The trading in the foreign exchange market may take place in thefollowing forms:

Outright cash or ready foreign exchange currency deals that take

place on the date of the deal.

Next day foreign exchange currency deals that take place on thenext working day.


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Swap Simultaneous sale and purchase of identical amounts ofcurrency for different maturities.

Spot and Forward contracts A Spot contract is a bindingobligation to buy or sell a definite amount of foreign currency at the

existing or spot market rate. A forward contract is a binding obligation tobuy or sell a definite amount of foreign currency at the pre-agreed rateof exchange, on or before a certain date.

The advantage of spot dealing has resulted in a simplest way to dealwith all foreign currency requirements. It carries the greatest risk ofexchange rate fluctuations due to lack of certainty of the rate until thedeal is carried out. The spot rate that is intended to receive will be set bycurrent market conditions, the demand and supply of currency beingtraded and the amount to be dealt. In general, a better spot rate can bereceived if the amount of dealing is high. The spot deal will come to an

end in two working days after the deal is struck.

A forward market needs a more complex calculation. A forward rate isbased on the existing spot rate plus a premium or discounts which aredetermined by the interest rate connecting the two currencies that areinvolved. For example, the interest rates of UK are higher than that of USand therefore a modification is made to the spot rate to reflect thefinancial effect of this differential over the period of the forward contract.The duration will be up to two years for a forward contract. A variation inforeign exchange markets can be affected to any company whether ornot they are directly involved in the international trade or not. This is

often referred to as Economic foreign exchange and most difficult toprotect a business.

The three ways of managing risks are as follows:

Choosing to manage risk by dealing with the spot market whenever theneed of cash flow rises. This will result in a high risk and speculativestrategy since one will not know the rate at which a transaction is dealtuntil the day and time it occurs. Managing the business becomes difficultif it depends on the selling or buying the currency in the spot market.

The decision must be made to book a foreign exchange contract withthe bank whenever the foreign exchange risk is likely to occur. This willhelp to fix the exchange rate immediately and will give a clear idea ofknowing the exact cost of foreign currency and the amount to bereceived at the time of settlement whenever this due occurs.


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Figure 7.1: Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are:

Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market.

Liquidity risks occur due to the requirement of available counterpartiesto take the other side of the trade.

Settlement risks similar to the credit risks occur when the partiesinvolved in the contract fail to provide the currency at the agreed time.

Operational risks are one of the biggest risks that occur in tradingderivatives due to human error.

Legal risks pertain to the counterparties of currency swaps that go into

receivership while the swap is taking place.

7.3.3 International monetary systems

The international monetary systems represent the set of rules that areagreed internationally along with its conventions. It also consists of set of
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rules that govern international scenario, supporting institutions whichwill facilitate the worldwide trade, the investment across cross-bordersand the reallocation of capital between the states.

International monetary systems provide the mode of payment

acceptable between buyers and sellers of different nationality, withaddition to deferred payment. The global balance can be corrected byproviding sufficient liquidity for the variations occurring in trade. Therebyit can be operated successfully.

The gold and gold bullion standards

The gold standard was the first modern international system. It wasoperating during the late 19th and early 20th centuries, the standardprovided for the free circulation between nations of gold coins ofstandard specification. The gold happened to be the only standard of

value under the system. The advantages of this system depend in itsstabilising influence. Any nation which exports more than its importwould receive gold in payment of the balance. This in turn has resultedin the lowered value of domestic currency. The higher prices lead to thedecreased demands for exports. The sudden increase in the supply ofgold may be due to the discovery of rich deposit, which in turn will resultin the increase of price abruptly.

This standard was substituted by the gold bullion standard during the1920s; thereby the nations no longer minted gold coins. Instead,reversed their currencies with gold bullion and determined to buy and

sell the bullion at a fixed cost. This system was also discarded in the1930s.

The gold-exchange system

Trading was conducted internationally with respect to the gold-exchangestandard following World War II. In this system, the value of the currencyis fixed by the nations with respect to some foreign currency but not withrespect to gold. Most of the nations fixed their currency to the US dollarfunds in the United States. With a view to maintain a stable exchangerate at the global level, the International Monetary Fund (IMF) was

created at the Bretton Woods international Conference held in 1944.The drain on the US gold reserves continued up to the 1970s. Later in1971, the gold convertibility was abandoned by the United States leavingthe world without a single international monetary system.

Floating exchange rates and recent development


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MB0053-International Bussiness Mgmt

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